One family’s struggle out of debt

Tonight, reality TV comes to personal finance. Money MakeOver, a spinoff of Global’s daily MoneyWise program, puts a young Canadian couple under a financial microscope and illuminates the path to financial nirvana. And yours truly is one of those shedding the light.

The premiere takes a look at a couple, James and Angel, who live north of Toronto. Selected from a pool of several hundred applicants, they face a situation common to many young Canadians: they’re heavily in debt, they’re not quite sure where all their money is going, and they’re confronted by competing demands for their cash.

Angel has a 10-year-old son by an earlier relationship and the couple is expecting a child. This impending event threatens to put even more strain on their already stretched finances. They have an idyllically located rural dream home that includes six acres of land. They love skiing and snow-boarding, so the house amounts to a full-time ski chalet.

However, the property is heavily mortgaged, and the pair is also coping with substantial credit card debt, student loans, commuting expenses and unexpected financial emergencies – “disasters” is Angel’s preferred term – that seem to crop up at the most inopportune moments.

Despite a combined income of $96,000 a year – Angel is the main breadwinner as a software analyst; James has sporadic work in construction – the couple has not even begun to put aside money for their retirement. Not that they wouldn’t like to build a nest egg soon. “I’d like to retire now if I could. Move to a beach,” says James, who is 29.

“I’d like to do that too, but it doesn’t seem possible,” says Angel, who’s in her early 30s. They view paying off the mortgage as quickly as possible as a big step in that direction.

By agreeing to be guinea pigs for a financial makeover, the couple got something they would not otherwise have obtained: access to financial advisor Cynthia Kett. Kett normally charges $250 an hour; most couples like James and Angel would typically rely on financial planning advice offered for free by the bank holding their mortgage or line of credit.

Two months ago, Kett grilled the couple about their finances, scrutinizing their spending habits and totalling up their bills and credit card charges. Somehow, James and Angel just can’t seem to account for how they spend $2,000 a month.

The pair admits they’re torn between various priorities,

“Owning a house was very important to us,” Angel says. “We feel like we’re wasting money when we rent and we had so many problems with the landlords and really wanted a space of our own.”

But jettisoning the mortgage and becoming instantly debt-free is also appealing. James can see the advantage of renting an apartment or condo: less maintenance, yard work and snow shoveling.

One of the problems with the status quo is that both must commute to jobs in northern Toronto. Angel’s employer seems disinclined to let her telecommute and work from home. Compounding the concern about high gas expenses is James’s penchant for buying old “beater” cars and trying to fix them up. His last beater gave up the ghost, and they only lease one new car.

At the end of her visit, Kett provided the couple with half a dozen recommendations. She put them on a “severe debt reduction” program with the idea of wiping out the credit-card debt first and leaving their long-held goal of paying off the mortgage for the future.

A while later, it was up to MoneyWise co-host Deirdre McMurdy and me to reinforce or second-guess Kett’s recommendations, dispensing whatever gems of advice or wit occurred to us.

Is it possible to pay off large debts and begin long-term savings at the same time?

A bank survey released last week showed it’s much easier to amass sufficient retirement savings if you start at 30 rather than waiting till 45. And it can be done. Books like George S. Clason’s The Richest Man in Babylon counsel simultaneously tackling debts with 20% of cash flow and allocating 10% in parallel to wealth accumulation.

Kett feels James and Angel will be better off focusing first on debt reduction. Hopefully, when the debt is eliminated, they can divert to savings that was previously eaten up by repayments.

“They’re in dire circumstances. They really need to wrestle their debt to the ground and that’s why it was such a high priority.”

This approach fits Kett’s philosophy of providing both defensive and offensive planning. Defensive planning makes contingencies for the worst that might happen, and so emphasizes debt reduction, insurance and building an emergency cash cushion. Offensive planning, including RRSPs and RESPs for the children, may have to take a back seat until the defences are properly established.

Kett says that James’s and Angel’s preference for consumption over saving is a very common proclivity. “Most clients we deal with have got their financial act together,” Kett says, “but I think it’s typical of people in general, and not necessarily of this generation” to live for today.

Another month passed and we met the happy couple again to congratulate or chastise them on their progress, or lack of same. Do they follow our advice? How do things turn out?

You’ll have to tune in tonight to learn the outcome, which revolves around an agonizing decision based on the home and their rural lifestyle.

As for how it feels to expose yourself financially on nationwide television, “at first it didn’t bother me,” Angel says.

“But halfway through I felt a little intimidated by it. It’s one thing to tell people we owe this much and I make around that, but to actually put it into numbers is kind of weird.”